Social security versus private retirement accounts

FEDER AL RESERVE BANK OF ST. LOUIS REVIEW MARCH/APRIL, PART 1 2005 103
Social Security versus Private Retirement Accounts:
A Historical Analysis
Thomas A. Garrett and Russell M. Rhine
ply refer to this as Social Security throughout the
remainder of the paper, unless noted otherwise.
Social Security (OASDI) is commonly referred
to as a pay-as-you-go pension system.3 Rather than
paying an individual benefits from a fund that
they have built up over time (called a fully funded
pension system), a pay-as-you-go system relies
on tax revenue from current workers to fund the
benefits of current recipients. Over 47 million
Americans received benefits through the OASDI
system in 2003 (roughly 16 percent of the U.S.
population).4 Considering only retirees and their
dependents, nearly 33 million Americans received
OASI benefits in 2003 (roughly 11 percent of the
U.S. population and 91 percent of the U.S. popu-
lation over age 65). The system is funded by pay-
roll taxes levied equally on employees and their
employer up to a maximum income level ($90,000
in 2005).5 The current tax rate for each employee
and his employer is 6.2 percent (for a total rate
INTRODUCTION
T
he Social Security Act of 1935 remains one
of the largest and most enduring mandates
of federal government activity.1 Although
the term Social Security is commonly used to
refer to retirement benefits, the Social Security
system has evolved over time to include other
social welfare programs as well. Initially, the
Act provided for only old-age retirement benefits
(also called Old Age Insurance, or OAI). Benefits
for survivors were added in 1939, and the system
became known as OASI. Disability benefits were
added in 1954 (OASDI). The final addition came
in 1965, when Medicare was enacted, giving the
present-day program the name OASDHI. As seen
in Figure 1, Social Security, disability, and
Medicare benefits are the largest expenditures of
the federal government, with nearly $725 billion
(7 percent of gross domestic product, 34 percent
of total federal spending) spent on OASDHI in
2003.2 We focus specifically on OASDI and sim-
This paper compares Social Security benefits relative to those paid from private investments:
specifically, whether 2003 retirees would gain more retirement income if they had invested their
payroll taxes in private accounts during their working years. Three different retirement ages and
four possible earnings levels are considered for two private investments—6-month CDs or the
S&P 500. On average, the results suggest less than 5 percent of current retirees would receive a
higher monthly benefit with Social Security. Several Social Security reform proposals are described.
Federal Reserve Bank of St. Louis Review, March/April 2005, 87(2, Part 1), pp. 103-21.
1
Extensive academic research has addressed the economics of
Social Security. For a discussion of Social Security’s rate of return
relative to private investments and the impact of Social Security
on private savings, see Feldstein, Poterba, and Dicks-Mireaux (1981),
Boskin (1977, 1978), Campbell and Campbell (1976), and Boskin
and Hurd (1978).
2
Transfer payments are not included in gross domestic product.
3
A true pay-as-you-go system takes in revenues only in the amount
it disperses them to recipients. Social Security, however, has run
surpluses and deficits over its history.
4
Based on Social Security data.
5
Income subject to OASDI payroll taxes was capped at $3,000 in
1950, $25,900 in 1980, and $51,300 in 1990. See
www.ssa.gov/OACT/COLA/cbb.html#Series for a complete history
of all income limits.
Thomas A. Garrett is a senior economist at the Federal Reserve Bank of St. Louis. Russell M. Rhine is an assistant professor at St. Mary’s
College of Maryland. Molly Dunn-Castelazo provided research assistance.
© 2005, The Federal Reserve Bank of St. Louis.

of 12.4 percent). Payroll tax rates have increased
since the 1930s, as seen in Table 1.6
Since the inception of Social Security in 1937,
for most years revenues coming in have been
greater than expenditures going out. In 2003, for
example, OASI trust fund revenues from payroll
taxes totaled $544 billion, while benefits summed
to $406 billion.7 By law, any surplus revenue must
be credited to the Social Security trust fund. Trust
fund monies are invested in federal government
securities (Treasury securities) to earn a rate of
return. There are no actual funds held in the trust
fund; the federal government regularly uses these
monies for both mandatory and discretionary
purposes. The size of the Social Security trust
fund was roughly $1.4 trillion at the end of 2003.
Revenues, expenditures, and the trust fund bal-
ances for selected years are shown in Table 2.
Prelude to a Crisis
The Social Security system remains quite
solvent today, despite an increase in the number
of benefit recipients and increasing expenditures
as a percentage of total federal spending. As seen
in Figure 2, the number of OASDI beneficiaries
has increased from nearly 26 million in 1970 to
over 47 million in 2003, which is an average
Garrett and Rhine
104 MARCH/APRIL, PART 1 2005 FEDER AL RESERVE BANK OF ST. LOUIS REVIEW
Table 1
Payroll Tax Rates
OASDI tax rate for
Calendar year employees and employers (each)
1937-49 1.000
1950 1.500
1951-53 1.500
1954-56 2.000
1957-58 2.250
1959 2.500
1960-61 3.000
1962 3.125
1963-65 3.625
1966 3.850
1967 3.900
1968 3.800
1969-70 4.200
1971-72 4.600
1973 4.850
1974-77 4.950
1978 5.050
1979-80 5.080
1981 5.350
1982-83 5.400
1984 5.700
1985 5.700
1986-87 5.700
1988-89 6.060
1990 and later 6.200
SOURCE: Social Security Administration:
www.ssa.gov/OACT/ProgData/taxRates.html.
National Defense (19%)
Education (4%)
Health (10%)
Medicare (12%)
Social Security (22%)
All Other (34%)
Figure 1
Major Federal Outlays
Percentage of Total Expenditures, 2003
SOURCE: Office of Management and Budget.
6
Statistics on the Social Security system can be found at
www.ssa.gov/OACT/STATS/index.html.
7 In addition to the direct contributions obtained from the payroll
tax, there is an additional payment into the system. This payment
is interest paid on Treasury securities that are held by the Social
Security trust fund. The portfolio of Treasury securities earns
interest income that is an expense to the federal government and
subsequently to the taxpayer. This is a relatively small indirect
Social Security income tax, less than 1 percent, but it is worth
mentioning to accurately explain the source of funds to the system.
The indirect Social Security tax rate is generated by finding the
product of the percent of worker’s income paid in federal income
taxes and the percent of federal government expenditures paid as
interest on the federal government debt held by the Social Security
trust fund.

annual increase of 1.86 percent. In terms of the
entire U.S. population, 12.6 percent received some
OASDI benefit in 1970, compared with 16.2 per-
cent in 2003. OASDI expenditures as a percentage
of total federal spending rose from roughly 10
percent in 1957 to 22 percent in 2003, as seen in
Figure 3.
Reasons for the rapid rise in Social Security
expenditures include increases in the payroll tax
rate (see Figure 3), an increase in the scope of
coverage, the increasing longevity of the U.S.
population, and an increase in the share of the
elderly relative to the overall population. In 1950,
there were 16.5 workers paying Social Security
taxes for every retired person receiving benefits.
Garrett and Rhine
Table 2
OASI Trust Fund Data
Calendar year Total receipts ($ thousands) Total expenditures ($ thousands) Trust fund ($ thousands)
1937 $767,000 $1,000 $766
1940 368,000 62,000 2,031,000
1950 2,928,000 1,022,000 13,721,000
1960 11,382,000 11,198,000 20,324,000
1970 32,220,000 29,848,000 32,454,000
1980 105,841,000 107,678,000 22,823,000
1990 286,653,000 227,519,000 214,197,000
2000 490,513,000 358,339,000 930,836,000
2003 543,811,000 405,978,000 1,355,330,000
NOTE: The trust fund is the cumulating surpluses from all prior years. Trust funds for Medicare (HI) and Disability (DI) are not included.
SOURCE: Social Security Administration: www.ssa.gov/OACT/STATS/table4a1.html.
1970 1974 1978 1982 1986 1990 1994 1998 2002
20,000
25,000
30,000
35,000
40,000
45,000
50,000
10%
11%
12%
13%
14%
15%
16%
17%
18%
Thousands
Number of OASDI recipients
(left axis)
OASDI recipients as % of U.S. population
(right axis)
Figure 2
OASDI Recipients
Total as a Percentage of the U.S. Population
SOURCE: www.ssa.gov/OACT/STATS/OASDIbenies.html and
U.S. Bureau of the Census.
1957 1962 1967 1972 1977 1982 1987 1992 1997 2002
5%
10%
15%
20%
25%
2%
3%
4%
5%
6%
7%
OASDI as % of federal spending
(left axis)
OASDI tax rate
(right axis)
Figure 3
OASDI Expenditures as Percent of Federal
Spending and OASDI Payroll Tax Rate
SOURCE: www.ssa.gov/OACT/ProgData/taxRates.html,
www.ssa.gov/OACT/STATS/table4a3.html, and Office of
Management and Budget.

Today the number is 3.31, and by 2030 there will
be 2.17 workers paying taxes for every recipient.8
By 2030, there will be 70 million Americans of
retirement age, compared with about 35 million
today.9 Preserving the current Social Security sys-
tem for the next 75 years would require an imme-
diate increase in the payroll tax to 14.3 percent
(from its current level of 12.4 percent) or a 13 per-
cent reduction in all current and future benefits.10
Forecasts for the continued solvency of the
Social Security system are quite bleak. The Social
Security and Medicare Boards of Trustees (2004)
estimates that OASI inflows from payroll taxes
will be less than projected benefits by 2018, and
by 2044 the trust fund (which is currently $1.4
trillion) will be exhausted (see Table 3). If disabil-
ity insurance is also considered, the trust fund will
be depleted in 2042. These projections assume
no increase in the payroll tax. As seen in Figure 4,
Social Security costs (expenditures to recipients)
are expected to exceed payroll tax revenues by
2020, and deficit financing of Social Security
will continue until the trust fund is “exhausted”
around 2040.
Various solutions to preserving Social Security
for America’s retirees have been proposed, such
as raising payroll tax rates and cutting benefits.
These are steps that would more or less preserve
the current system and improve its solvency into
the future. Another option would allow individ-
uals to invest some of their payroll taxes in private
retirement accounts. Unlike cutting benefits or
raising payroll taxes, a move in this direction
would produce a social retirement system quite
different from the current Social Security system.
Our Objective
Social Security reform proposals range from
maintaining the current system to a complete
revamping of social insurance in the United States
by allowing individuals to invest their payroll tax
contributions in private retirement accounts.11
Garrett and Rhine
Table 3
Important Trust Fund Dates
OASI DI OASDI
First year outgo exceeds income, excluding interest 2018 2008 2018
First year outgo exceeds income, including interest 2029 2017 2028
Year trust fund assets are exhausted 2044 2029 2042
SOURCE: Board of Trustees, Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds (2004, Tables IV.B1, IV.B3,
and VI.F1).
1990 1995 2000 2005 2010 2020 2045 2070
5%
8%
10%
13%
15%
18%
20%
Income
Outlays
Figure 4
OASDI Income and Outlays
Percentage of Taxable Payroll
SOURCE: www.ssa.gov/OACT/TR/TR04/IV_LRest.html#wp257923.
8
Board of Trustees, Federal Old-Age and Survivors Insurance and
Disability Insurance Trust Funds (2004, pp. 47-48).
9
Social Security Administration: www.ssa.gov.
10
Board of Trustees, Federal Old-Age and Survivors Insurance and
Disability Insurance Trust Funds (2004, p. 56).
11
Many of these proposals will be discussed later in the paper.

We argue that a crucial factor of any Social Security
reform proposal is an analysis of the actual bene-
fits received from Social Security compared with
the benefits that would have been gained with a
system of private retirement accounts during
retirees’ working years. Assessing the benefits of
Social Security, in its current form, is an important
policy question because it can guide the direction
of Social Security reform. If a large percentage of
the population has received a rate of return from
Social Security that is greater than that which
could have been obtained by investing in financial
markets, then proposals that maintain or build
on the current system would be preferable to a
private investment approach to providing retire-
ment benefits.
This paper provides a historical look at the
benefits of Social Security relative to private
investments. We conduct an analysis—according
to various factors, such as income level and age
at retirement—to determine who has benefited
from the current system and who would have been
better off had they been allowed to invest their
Social Security contributions (payroll taxes) in a
private retirement account throughout their work-
ing years. We ask, for people retiring in 2003, if
their lifetime Social Security contributions were
alternatively fully invested in a private account,
would they have had a higher monthly income
during retirement than they are receiving from
Social Security.
WHO HAS BENEFITED?
Assumptions
We make several assumptions to easily com-
pare individuals at a more aggregate level. The
assumptions are four average levels of annual
income, years of contributions to the Social
Security system, the opportunity cost of Social
Security contributions, and retirement age. The
analysis also considers two different private
investments. These assumptions will allow us to
focus on a few age and income groups to investi-
gate who has borne the costs of the current system
and whether the benefits of the current system
would have been exceeded by the use of private
retirement accounts. Other assumptions used in
our analysis are listed in Table 4.
Methods and Stipulations
To analyze the impact of the Social Security
system on different types of individuals, it is nec-
essary to determine the opportunity cost of the
contribution (to what amount those contributions
would have accumulated if they had been privately
invested) and the disbursements from both Social
Security and the alternative private investment.
We calculate the exact amount of the contributions
to the Social Security system and apply them to
a market rate of return to obtain the opportunity
cost of Social Security. Thus, we get the value of
Garrett and Rhine
Table 4
Summary of Assumptions
• All contributions (both employee and employer) to the Social Security system are invested into the private
investment.
• The investments increase at the actual rate of return for each year.
• Investments are tax deferred—taxed at the time of distribution at the rate of 15 percent.
• The balance of the private investments continues to grow at the average real rate of return (average nominal
rate of return minus the average inflation rate) after retirement in 2003.
• Individuals remain in their same earnings level their entire life.
• An individual is considered to be better off during retirement by privately investing as opposed to participating
in Social Security if the amortized private investment balance at retirement is greater than the Social Security
benefit payment.
NOTE: Our data and programs are available on the web site of the Research Division of the Federal Reserve Bank of St. Louis:
research.stlouisfed.org/. The above assumptions can be altered within the programs to accommodate alternative analyses.

the contributions to the Social Security system
had the individual used those funds to make an
alternative private investment.
To calculate the contributions into the Social
Security system, we use four different levels of
earnings and multiply those earnings by the cor-
responding OASDI tax rate for each year (see
Table 1). We then multiply the contribution by 2
so that we capture both the employee and the
employer contribution. A breakdown of the con-
tributions is shown in the appendix. The earning
groups we use are low earners (45 percent of the
national average wage), average earners (national
average wage), high earners (160 percent of the
national average wage), and maximum earners
(maximum wage subject to payroll tax).12 In addi-
tion to considering different earnings, we also
consider three different retirement ages: 62 years,
65 years, and 70 years.
The two market rates of return that we use in
the analysis are the average monthly Standard
and Poor’s 500 Composite Index and the interest
rate on 6-month certificates of deposits (CDs).13
These were chosen to account for different risk
preferences of individual investors, realizing that
some people would prefer to have their retirement
investments in a relatively safe investment, such
as CDs, rather than the stock market. We assume
that CDs are rolled-over when they mature. The
13
The S&P 500 data is from the Wall Street Journal and the 6-month
CD rate of return is from the Board of Governors of the Federal
Reserve System. The composite index consists of 500 widely held
common stocks of leading companies. Unlike the total return index,
the composite index is the more conservative measure of market
performance, in that it does not assume the reinvestment of
dividends.
Garrett and Rhine
Table 5
Private Portfolio Balance at Retirement in 2003 Based on an Alternative Investment in the S&P 500
Earnings level
Retirement age/years working Low Average High Maximum
62/40 years $130,642 $290,315 $447,032 $591,113
65/43 years $136,517 $303,371 $461,740 $605,821
70/48 years $144,796 $321,768 $483,589 $627,670
NOTE: Actual employee and employer contributions to the Social Security system are increased annually by the actual return of the
S&P 500 Composite Index. See text for a description of earnings levels.
Table 6
Private Portfolio Balance at Retirement in 2003 Based on an Alternative Investment in 6-Month CDs
Earnings level
62/40 years $94,775 $210,611 $319,148 $416,787
65/43 years $100,771 $223,934 $334,159 $431,798
70/48 years $109,201 $242,668 $356,394 $454,033
NOTE: Actual employee and employer contributions to the Social Security system are increased annually by the 6-month CD rate.
For the years 1961-63 and 1956-63 for those retiring at age 65 and 70, respectively, the 40-year average of 6-month CD rates is used.
See text for a description of earnings levels.
12
The national average wage is a time series of annual wage data
that is generated by the Social Security Administration. See
www.ssa.gov.

S&P 500 has an average annual return of about 8.5
percent over the past 56 years. The rate of return
on 6-month CDs is lower than the S&P 500, at an
average of about 6.9 percent over 40 years, and is
much less volatile. Since CDs did not exist prior
to 1964, the 40-year average is used for the earlier
years.
The balance of an individual’s investment at
the time of retirement can be calculated by com-
bining employee and employer contributions to
the Social Security system and applying the market
rate of return for each of the two private invest-
ments. A nominal rate of return is used because
wages, and the corresponding contribution to
the private investments, are in nominal terms.
There is no comparable rate of return for Social
Security because the majority of contributions into
the system are immediately paid out to benefici-
aries. However, the trust fund rate of return is
the interest earned on Treasury securities. This
interest rate is lower than both the S&P 500 and
the 6-month CD rate, about 5.9 percent, and applies
only to a small portion of the payments into the
system.14 Tables 5 and 6 show the balance of the
two private portfolios, assuming retirement in the
year 2003.15
Calculation of Benefits
The Social Security Administration adjusts
the level of monthly benefit payments depending
on an individual’s age at retirement. For individ-
uals that choose early retirement, their monthly
Social Security benefits are reduced, whereas
benefits are increased for individuals that choose
to delay retirement. The Social Security Adminis-
tration considers normal retirement age to be 65
to 67 years old, early retirement to be 62 to 64
years old, and delayed retirement age to be greater
than 67 years old. Table 7 shows the monthly
Social Security benefits that an individual will
receive in 2003 based on various retirement ages
and earning levels. We assume that individuals
do not change their level of earnings throughout
their life.16
The private investment balance at the time of
retirement is amortized over a range of 1 to 30
years to determine the level of monthly benefit
payments. That is, assuming a constant real growth
rate of the portfolio during retirement and a given
number of life years, a fixed monthly payment is
calculated.17 The portion of the S&P 500 portfolio
that is not distributed continues to grow at a real
rate of 4.61 percent during retirement. This real
growth rate is the difference in the average rate of
return of the S&P 500 and the average inflation rate
16
Earning estimates and monthly benefits are from the Social Security
Administration, “Retirement Benefit Examples.” See
www.ssa.gov/OACT/COLA/examples.html.
17
The Excel PMT function is used to generate the monthly payment
amount.
Garrett and Rhine
Table 7
Social Security Monthly Benefits in 2003
Earnings level
62/40 years $575 $947 $1,242 $1,412
65/43 years $701 $1,157 $1,512 $1,721
70/48 years $832 $1,386 $1,785 $2,045
NOTE: Monthly benefit payments are based on the 35 highest income years of work (income not to exceed the maximum level of
taxable income) and are adjusted based on age at retirement. See text for a description of earnings levels.
SOURCE: Social Security Administration: www.ssa.gov/OACT/COLA/examples.html.
14
This figure, 5.9 percent, is the 44-year average (1960-2003) for 6-
month Treasury securities sold on the secondary market. Source:
Board of Governors of the Federal Reserve System.
15
We assume that all four groups have the same labor productivity
growth over time and that each group’s factor endowments remain
unchanged.

for the years 1948-2003 (8.49 percent – 3.88 per-
cent). Similarly, the portion of the 6-month CD
portfolio that is not distributed continues to grow
at a real rate of 3.0 percent. This real growth rate is
the difference in the average rate of return of the
6-month CDs (1964-2003) and the average inflation
rate for the years 1948-2003 (6.88 percent – 3.88
percent). The Social Security benefit is constant
because the annual increase in the Social Security
benefit is simply a cost of living adjustment and
does not increase in real terms. The private benefit
decreases as the age at death increases because the
portfolio balance is amortized over a longer period.
Results
Figures 5 through 7 show the real monthly
benefit paid by Social Security and the real
monthly benefit from the two amortized private
portfolios for each of three different retirement
ages. In reality, people do not know when they are
going to die. However, it is clear that in most cases
it does not matter how long people choose to amor-
tize their savings—they will still receive a higher
monthly payment from the private portfolio than
the Social Security benefit. If people die early in
retirement, or prior to retirement, their families
receive a small death benefit ($255) and survivor
benefits (up to 100 percent) of the deceased
spouse’s benefits. As long as a widowed spouse
does not live beyond the age shown in Tables 8 and
9, he or she will receive a private investment bene-
fit that is greater than the Social Security benefit.
Regarding taxes, we assume that the private
investment accounts were tax deferred—that is,
taxes are only paid on distributions during retire-
Garrett and Rhine
70 75 80 85 90 95 100
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
70 75 80 85 90 95 100
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
70 75 80 85 90 95 100
$0
$1,000
$2,000
$3,000
$4,000
$5,000
70 75 80 85 90 95 100
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
Monthly Benefits Monthly Benefits
Age at Death Age at Death
S&P 500
S&P 500
S&P 500 S&P 500
6-Month CDs
6-Month CDs
6-Month CDs
6-Month CDs
Social Security
Social Security
Social Security
Social Security
Average EarnersLow Earners
High Earners Maximum Earners
Figure 5
Monthly Benefits from Social Security, S&P 500, and 6-Month CDs
Retirement Age: 62
SOURCE: See the appendix for source information.

ment years. We assume a tax rate of 15 percent on
distributions from private investment accounts.18
Tax law treats Social Security payments and dis-
bursements from private accounts differently in
terms of tax liability—100 percent of private
account disbursements is considered as income,
whereas only a portion of Social Security benefits
is considered income.19 We assume no taxes are
paid on Social Security benefits because annual
Social Security disbursements fall below the mini-
mum level of taxable income.
A comparison of the monthly private invest-
ment benefit with the Social Security benefit, for
a given age at death, provides evidence on whether
various age and income groups received a greater
retirement benefit from Social Security than they
would have from private investments. Using
Figures 5 though 7, if either of the private invest-
ment benefits is greater than the Social Security
benefit, then individuals in the specific age and
income cohort received a lower monthly benefit
from Social Security than if they had invested in
a private retirement account during their working
years.
Figures 5 through 7 provide the following
conclusions: For those people retiring at age 62,
none would benefit more from the current Social
Security system relative to private investments in
the S&P 500 (Figure 5). A person retiring at age 65
Garrett and Rhine
70 75 80 85 90 95 100
$0
$500
$1,000
$1,500
$2,000
$2,500
70 75 80 85 90 95 100
$0
$1,000
$2,000
$3,000
$4,000
$5,000
70 75 80 85 90 95 100
$0
$2,000
$4,000
$6,000
$8,000
70 75 80 85 90 95 100
$0
$2,000
$4,000
$6,000
$8,000
$10,000
S&P 500 S&P 500
S&P 500 S&P 500
6-Month CDs
6-Month CDs
6-Month CDs
6-Month CDs
Social Security
Social Security
Social Security
Social Security
Figure 6
Retirement Age: 65
18
For 2003, the 15 percent tax bracket applied to a taxable income
(total income less deductions and exemptions) of $14,000 to $56,800
(married filing jointly). We use a 15 percent tax bracket because
most annual incomes at the time of death are within this range.
19
See http://taxguide2002.completetax.com/text/c60s10d573.asp?style=8
or the instruction booklet for the 2003 Form 1040 at www.irs.gov
for a discussion on the taxation of Social Security benefits.

will only benefit more from Social Security relative
to a private investment in the S&P 500 if he is a
low earner and lives to be at least 96 years old
(Figure 6). Finally, for those retiring at age 70, the
only individuals that benefit more from Social
Security are low earners who live to be at least 94
years old and average earners who live to be at
least 108 years old, assuming an investment in the
S&P 500 (Figure 7). Tables 8 and 9 provide a sum-
mary of which age and income groups benefit more
from the Social Security system relative to the
S&P 500 (Table 8) and the 6-month CDs (Table 9).20
We can now address the question of who has
benefited more from the current Social Security
system relative to a situation in which they had
been allowed to invest their Social Security con-
tributions in private retirement accounts through-
out their working years.
First consider the S&P 500 (Table 8). The U.S.
Census estimates that there are 415,000 people
in the U.S. over the age of 94 and that the total U.S.
population is 290,809,777 (as of 2003). Thus, the
percentage of the population that is 95 years old
or older is 0.14 percent of the U.S. population. If
we assume that this age group is evenly distributed
over the four income groups, then roughly 0.04
percent (4 of every 10,000) of the current total
U.S. population would benefit more from Social
Security than from a retirement investment in
the S&P 500.
Garrett and Rhine
75 80 85 90 95 100 105
$0
$500
$1,000
$1,500
$2,000
$2,500
75 80 85 90 95 100 105
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
75 80 85 90 95 100 105
$0
$2,000
$4,000
$6,000
$8,000
75 80 85 90 95 100 105
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
S&P 500
S&P 500
S&P 500
S&P 500
6-Month CDs
6-Month CDs
6-Month CDs
6-Month CDs
Social Security
Social Security
Social Security
Social Security
Figure 7
Retirement Age: 70
20
We ignore the role of spousal benefits. Under current law, a spouse
is guaranteed a benefit equal to half the monthly benefit of the higher
earning spouse. As long as the monthly benefit from a private
retirement account is less than 50 percent higher than the monthly
Social Security benefits, the latter is preferred by single-earner
couples.

A similar analysis can be done for an invest-
ment in 6-month CDs (Table 9). The number of
people in the U.S. that are 80 years old or older is
10,130,000, or 3.5 percent of the total U.S. popu-
lation. Because certain age and income groups
would benefit more from Social Security relative
to 6-month CD investments if they lived long
enough, 3.5 percent is an upper bound on the
percentage of the U.S. population that would
benefit more from Social Security relative to a
retirement investment in 6-month CDs.
It is also interesting that the number of people
who benefit overall from the current system will
decrease in the future as the average annual tax
rate increases and benefit calculations remain
unchanged. Since those people retiring in 2003
have not always paid into the system at the current
high rate of 12.4 percent, their average tax rate is
only 10.7 percent, assuming 40 years of work. This
average tax rate will increase in later years as
future retirees have fewer years paid in at lower
tax rates and more years paid in at a higher rate
(assuming 40 years of work). Figure 8 illustrates
how future retirees will be paying a higher average
tax rate over their working life, even if the current
tax rate is unchanged. This will further reduce the
number of people that benefit from the current
Social Security system.
It can be argued that some individuals will
not realize the importance of investing for retire-
ment and, therefore, the government should pro-
vide a means of income for retirees. While this is
an interesting argument, it is a debatable question
that we are leaving for the politicians and voters.
From our numerical analysis, we find that over 99
percent of the U.S. population would have earned
a greater return by investing in the S&P 500, and
over 95 percent would have earned a greater return
by investing in 6-month CDs relative to the current
Social Security system. Although a common criti-
Garrett and Rhine
Table 8
Those Who Would Benefit More from the Social Security System (by Age) Compared with an
Alternative Investment in the S&P 500
Earnings level
62/40 years None None None None
65/43 years 96 or older None None None
70/48 years 94 or older 108 or older None None
NOTE: These beneficiaries are based on Figures 5 through 7 and the corresponding tables. See text for a description of earnings levels.
Table 9
Those Who Would Benefit More from the Social Security System (by Age) Compared with an
Alternative Investment in 6-Month CDs
Earnings level
62/40 years 81 or older 88 or older 93 or older 100 or older
NOTE: These beneficiaries are based on Figures 5 through 7 and the corresponding tables. See text for a description of earnings levels.

cism of investing future retirement funds in the
stock market is the risk of a significant downturn
in the market at the time of retirement, our analysis
considered the recent market downturn and all
other downturns over the past 56 years. Despite
these market fluctuations, a long-term investment
in the S&P 500 for a 2003 retiree would have
yielded a greater monthly income than is provided
under the current Social Security system.21
THE FUTURE OF SOCIAL
SECURITY
There is overwhelming evidence that the cur-
rent Social Security system will become insolvent
within the next several decades. As such, there is
an extensive academic literature on the subject.22
Policymakers are becoming more aware of the
problem, and numerous proposals to improve
the solvency of Social Security have been raised.
These proposals consist of one or more of four
basic elements: (i) increasing payroll taxes, (ii)
decreasing benefits, (iii) using revenues from the
general fund, and (iv) allowing individuals or the
government to invest some or all of an individual’s
payroll tax in financial markets, which typically
have a higher rate of return than Social Security.23
Several proposals to reform Social Security
are overviewed below, each containing one or
more of the four elements described above24:
• Social Security Guarantee Plan. This plan
relies on revenues from the general fund to
finance private accounts for individuals.
These private accounts have a rate of return
higher than that of government securities.
The government’s contribution to a private
account would be equal to 2 percent of the
individual’s wage (up to the Social Security
wage cap). An individual’s total benefit
(Social Security + market return) would be
guaranteed to never fall below the Social
Security defined benefit obtained without
market investment. Payroll taxes would be
reduced under this plan, and Social
Security benefits would not be reduced.
• Trust Fund Investment Plans. Up to 15
percent of the Social Security trust fund
would be invested in equities, and addi-
tional monies would be transferred from
the general fund to the Social Security trust
fund. Unlike the Social Security Guarantee
Plan, which invests payroll taxes in private
accounts, this plan directly invests a portion
of the trust fund in equities. No change in
payroll taxes would be required under this
plan, but a reduction in Social Security
benefits would occur.
• Social Security Solvency Act of 1999. This
plan would initially cut payroll taxes by 2
percentage points and allow voluntary
contributions in private accounts in the
23
Numerous Social Security reform proposals are discussed in Lyon
and Stell (2000), Pecchenino and Pollard (1998), Auerbach and
Kotlikoff (1985), Feldstein (1975), Gramlich (1996), Diamond and
Orszag (2003), and the Concord Coalition at
www.concordcoalition.org/entitlements/ss_summaries.html, and the
Social Security Reform Center at www.socialsecurityreform.org.
24
See Lyon and Stell (2000) for a detailed discussion of each plan.
Garrett and Rhine
2003 2006 2009 2012 2015 2018 2021 2024 2027
9.5%
10.0%
10.5%
11.0%
11.5%
12.0%
12.5%
13.0%
Combined Tax Rate, 40-Year Average
Retirement Year
Figure 8
Average Annual Combined Employee and
Employer Social Security Tax Rate
NOTE: Average tax rate paid over 40 years of work assuming no
payroll tax increase from the current rate of 12.4 percent.
SOURCE: www.ssa.gov/OACT/ProgData/taxRates.html.
21
For the years 2001, 2002, and 2003, the S&P 500 index had returns
of –16.45 percent, –16.48 percent, and –3.20 percent, respectively.
22
See Geanakoplos, Mitchell, and Zeldes (1998a,b), Kotlikoff,
Smetter, and Walliser (1999), Fuster (1999), and Cooley and Soares
(1999).

amount of 1 percent of wages (1 percent also
matched by employer). Social Security
benefits would be cut, and the payroll tax
would be increased 3.3 percentage points
in 2029.
• Bipartisan Social Security Reform Plan.
Two percentage points of the payroll tax
would be transferred into private accounts.
The reduction in payroll tax revenue would
be replaced with monies from the general
fund. No payroll tax changes would occur
under this plan, and Social Security bene-
fits would be reduced depending upon the
return from private accounts.
Currently, no plan for Social Security reform
has moved beyond the proposal stage because of
the highly political nature of each of the reform
elements. Certainly, current retirees and those
individuals approaching retirement would not
favor a cut in benefits. However, current workers
would probably not favor an increase in payroll
taxes. These workers, however, are likely to be
more amenable to private investment accounts
than current retirees. Different age cohorts will
favor different alternatives. When (or if) a Social
Security reform plan is passed, it is likely to be
the one favored by the age cohort wielding the
greatest political influence.
Given the political nature of Social Security
reform, it is unlikely that any initial reform would
allow individuals to invest all of their payroll tax
contributions in private retirement accounts. Our
findings suggest that an initial Social Security
reform plan could include at least some invest-
ment in private retirement accounts. However,
cost and subsequent coverage may be an obstacle
in the transition toward private investment retire-
ment accounts. Over time, if some or all of payroll
tax revenue was diverted to private funds, the
federal government would have to increase debt
issuance, raise taxes, or reduce benefits to continue
providing traditional Social Security for America’s
seniors. Higher payroll taxes may restore the sol-
vency of the system, but large increases in this tax
are likely to have distortionary effects on labor
supply and productivity. Decreased benefits, too,
may continue the solvency of Social Security, but
this reduction could be detrimental to individuals
relying solely on Social Security as their means
of income. Furthermore, transferring revenues
from the general fund to the trust fund may require
an increase in other taxes in order to maintain
the size of the general fund. In short, the general
equilibrium effects of any Social Security reform
plan should be fully understood when evaluating
any change to the system.
The three plans discussed earlier that provide
for private investment accounts would have sig-
nificant costs, as measured by transfers from the
general fund or other nonpayroll sources for the
period 2000-73: Social Security Guarantee Plan,
$41 trillion; Social Security Solvency Act, $2
trillion; and the Bipartisan Plan, $31 trillion.
Although a move to private investments is costly,
both the public and elected officials must decide
whether the cost of doing nothing to the current
Social Security system is more than the cost of
fixing it.
As mentioned, another concern over private
retirement accounts is volatility. Relative to Social
Security, investment in private accounts will
generate a higher return at the expense of greater
volatility. The fear of many opponents of private
retirement accounts is that a large drop in the stock
market occurring months before an individual’s
planned retirement would significantly reduce
their retirement income. However, our analysis
considered the most recent market downturn, as
well as all other downturns occurring in the past
56 years, and revealed that investment in private
retirement accounts would have yielded a monthly
retirement benefit greater than that received from
the current Social Security system.
What the future Social Security system may
look like is unclear, but it is clear that the future
solvency of the current system is in jeopardy.
Policymakers and the public are slowly realizing
the impending crisis, and numerous plans to
restore the solvency of Social Security or provide
adequate benefits to retirees have been proposed.
However, the highly political nature of Social
Security means that final adoption of any proposal
will be the result of a tough fight among competing
political interest groups. Hopefully, this paper
can provide a direction for discussion on Social
Security reform through its analysis of rates of
Garrett and Rhine

return under Social Security versus private retire-
ment accounts. While we are not advocating for
one system over another, our evidence suggests
that a great majority of current retirees would have
had a higher retirement income under private
accounts than they do now with the current Social
Security system.
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of the Federal Old-Age and Survivors Insurance
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Boskin, Michael J. “Taxation, Saving, and the Rate of
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Feldstein, Martin; Poterba, James M. and Dicks-
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Geanakoplos, John; Mitchell, Olivia S. and Zeldes,
Stephen P. “Would a Privatized Social Security
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Geanakoplos, John; Mitchell, Olivia S. and Zeldes,
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Gramlich, Edward M. “Different Approaches for
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Kotlikoff, Laurence J.; Smetters, Kent and Walliser,
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Lyon, Andrew B. and Stell, John L. “Analysis of
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“Reforming Social Security: A Welfare Analysis.”
Federal Reserve Bank of St. Louis Review, March/
April 1998, 80(2), pp. 19-30.
Garrett and Rhine

Garrett and Rhine
Appendix Table A1
Low Earners
Low fund
Low Tax rate 6-Month S&P Low fund balance
earnings (employer and CD rate 500 rate Low balance (6- (S&P 500
Year (45% of AWI)* employee) of return of return contribution† month CD)‡ account)‡
1956 $1,590 4.00% 6.88%** 15.14% $64 $68 $73
1957 $1,639 4.50% 6.88%** –4.81% $74 $151 $140
1958 $1,653 4.50% 6.88%** 4.19% $74 $241 $223
1959 $1,735 5.00% 6.88%** 24.09% $87 $351 $385
1960 $1,803 6.00% 6.88%** –2.66% $108 $490 $480
1961 $1,839 6.00% 6.88%** 18.66% $110 $642 $700
1962 $1,931 6.25% 6.88%** –5.87% $121 $815 $773
1963 $1,978 7.25% 6.88%** 11.99% $143 $1,025 $1,026
1964 $2,059 7.25% 3.82% 16.47% $149 $1,219 $1,369
1965 $2,096 7.25% 4.43% 8.36% $152 $1,432 $1,648
1966 $2,222 7.70% 5.63% –3.30% $171 $1,693 $1,759
1967 $2,346 7.80% 5.21% 7.83% $183 $1,974 $2,094
1968 $2,507 7.60% 6.00% 7.36% $191 $2,294 $2,453
1969 $2,652 8.40% 7.89% –0.87% $223 $2,716 $2,652
1970 $2,784 8.40% 7.66% –14.94% $234 $3,175 $2,455
1971 $2,924 9.20% 5.22% 18.11% $269 $3,624 $3,217
1972 $3,210 9.20% 5.02% 11.10% $295 $4,116 $3,902
1973 $3,411 9.70% 8.31% –1.62% $331 $4,816 $4,164
1974 $3,614 9.90% 9.98% –22.88% $358 $5,690 $3,487
1975 $3,884 9.90% 6.89% 4.00% $385 $6,493 $4,027
1976 $4,152 9.90% 5.62% 18.40% $411 $7,292 $5,254
1977 $4,401 9.90% 5.92% –3.73% $436 $8,185 $5,478
1978 $4,750 10.10% 8.61% –2.23% $480 $9,412 $5,825
1979 $5,166 10.16% 11.44% 7.29% $525 $11,073 $6,812
1980 $5,631 10.16% 12.99% 15.30% $572 $13,158 $8,514
1981 $6,198 10.70% 15.77% 7.80% $663 $16,001 $9,894
1982 $6,539 10.80% 12.57% –6.51% $706 $18,808 $9,910
1983 $6,858 10.80% 9.27% 33.99% $741 $21,361 $14,272
1984 $7,261 11.40% 10.68% 0.03% $828 $24,558 $15,104
1985 $7,570 11.40% 8.25% 16.44% $863 $27,517 $18,592
1986 $7,795 11.40% 6.51% 26.49% $889 $30,254 $24,642
1987 $8,292 11.40% 7.00% 21.36% $945 $33,382 $31,053
1988 $8,700 12.12% 7.90% –7.34% $1,054 $37,158 $29,752
1989 $9,045 12.12% 9.08% 21.48% $1,096 $41,728 $37,474
1990 $9,463 12.40% 8.17% 3.63% $1,173 $46,407 $40,051
1991 $9,815 12.40% 5.91% 12.44% $1,217 $50,438 $46,403
1992 $10,321 12.40% 3.76% 10.50% $1,280 $53,665 $52,690
1993 $10,410 12.40% 3.28% 8.58% $1,291 $56,758 $58,612
1994 $10,689 12.40% 4.96% 1.98% $1,325 $60,962 $61,122
1995 $11,118 12.40% 5.98% 17.66% $1,379 $66,069 $73,540
1996 $11,661 12.40% 5.47% 23.85% $1,446 $71,205 $92,871
1997 $12,342 12.40% 5.72% 30.10% $1,530 $76,899 $122,812
1998 $12,988 12.40% 5.44% 24.25% $1,610 $82,784 $154,590
1999 $13,711 12.40% 5.46% 22.30% $1,700 $89,095 $191,135
2000 $14,470 12.40% 6.58% 7.59% $1,794 $96,872 $207,580
2001 $14,815 12.40% 3.64% –16.45% $1,837 $102,303 $174,971
2002 $14,963 12.40% 1.81% –16.48% $1,855 $106,040 $147,688
2003 $15,329 12.40% 1.17% –3.20% $1,901 $109,201 $144,796

Garrett and Rhine
Appendix Table A2
Average Earners
Average Average
Average Tax rate 6-Month S&P fund fund balance
earnings (employer and CD rate 500 rate Average balance (6- (S&P 500
Year (AWI)* employee) of return of return contribution† month CD)‡ account)‡
1956 $3,532 4.00% 6.88%** 15.14% $141 $151 $163
1957 $3,642 4.50% 6.88%** –4.81% $164 $337 $311
1958 $3,674 4.50% 6.88%** 4.19% $165 $536 $496
1959 $3,856 5.00% 6.88%** 24.09% $193 $779 $855
1960 $4,007 6.00% 6.88%** –2.66% $240 $1,090 $1,066
1961 $4,087 6.00% 6.88%** 18.66% $245 $1,427 $1,556
1962 $4,291 6.25% 6.88%** –5.87% $268 $1,812 $1,717
1963 $4,397 7.25% 6.88%** 11.99% $319 $2,277 $2,280
1964 $4,576 7.25% 3.82% 16.47% $332 $2,709 $3,042
1965 $4,659 7.25% 4.43% 8.36% $338 $3,181 $3,662
1966 $4,938 7.70% 5.63% –3.30% $380 $3,762 $3,909
1967 $5,213 7.80% 5.21% 7.83% $407 $4,386 $4,653
1968 $5,572 7.60% 6.00% 7.36% $423 $5,098 $5,450
1969 $5,894 8.40% 7.89% –0.87% $495 $6,034 $5,894
1970 $6,186 8.40% 7.66% –14.94% $520 $7,056 $5,455
1971 $6,497 9.20% 5.22% 18.11% $598 $8,053 $7,149
1972 $7,134 9.20% 5.02% 11.10% $656 $9,146 $8,672
1973 $7,580 9.70% 8.31% –1.62% $735 $10,703 $9,254
1974 $8,031 9.90% 9.98% –22.88% $795 $12,645 $7,750
1975 $8,631 9.90% 6.89% 4.00% $854 $14,429 $8,948
1976 $9,226 9.90% 5.62% 18.40% $913 $16,205 $11,676
1977 $9,779 9.90% 5.92% –3.73% $968 $18,190 $12,173
1978 $10,556 10.10% 8.61% –2.23% $1,066 $20,915 $12,944
1979 $11,479 10.16% 11.44% 7.29% $1,166 $24,607 $15,138
1980 $12,513 10.16% 12.99% 15.30% $1,271 $29,240 $18,921
1981 $13,773 10.70% 15.77% 7.80% $1,474 $35,559 $21,986
1982 $14,531 10.80% 12.57% –6.51% $1,569 $41,796 $22,023
1983 $15,239 10.80% 9.27% 33.99% $1,646 $47,469 $31,715
1984 $16,135 11.40% 10.68% 0.03% $1,839 $54,572 $33,565
1985 $16,823 11.40% 8.25% 16.44% $1,918 $61,148 $41,317
1986 $17,322 11.40% 6.51% 26.49% $1,975 $67,230 $54,761
1987 $18,427 11.40% 7.00% 21.36% $2,101 $74,183 $69,007
1988 $19,334 12.12% 7.90% –7.34% $2,343 $82,573 $66,116
1989 $20,100 12.12% 9.08% 21.48% $2,436 $92,729 $83,275
1990 $21,028 12.40% 8.17% 3.63% $2,607 $103,126 $89,003
1991 $21,812 12.40% 5.91% 12.44% $2,705 $112,085 $103,119
1992 $22,935 12.40% 3.76% 10.50% $2,844 $119,256 $117,090
1993 $23,133 12.40% 3.28% 8.58% $2,868 $126,130 $130,248
1994 $23,754 12.40% 4.96% 1.98% $2,945 $135,472 $135,826
1995 $24,706 12.40% 5.98% 17.66% $3,064 $146,821 $163,422
1996 $25,914 12.40% 5.47% 23.85% $3,213 $158,234 $206,381
1997 $27,426 12.40% 5.72% 30.10% $3,401 $170,887 $272,916
1998 $28,861 12.40% 5.44% 24.25% $3,579 $183,964 $343,533
1999 $30,470 12.40% 5.46% 22.30% $3,778 $197,988 $424,745
2000 $32,155 12.40% 6.58% 7.59% $3,987 $215,272 $461,289
2001 $32,922 12.40% 3.64% –16.45% $4,082 $227,340 $388,825
2002 $33,252 12.40% 1.81% –16.48% $4,123 $235,644 $328,197
2003 $34,065 12.40% 1.17% –3.20% $4,224 $242,668 $321,768

Garrett and Rhine
Appendix Table A3
High Earners
High High High
earnings Tax rate 6-Month S&P fund fund balance
(160% (employer and CD rate 500 rate High balance (6- (S&P 500
Year of AWI)* employee) of return of return contribution† month CD)‡ account)‡
1956 $5,652 4.00% 6.88%** 15.14% $168†† $180 $193
1957 $5,827 4.50% 6.88%** –4.81% $189†† $394 $364
1958 $5,878 4.50% 6.88%** 4.19% $189†† $623 $576
1959 $6,169 5.00% 6.88%** 24.09% $240†† $922 $1,013
1960 $6,411 6.00% 6.88%** –2.66% $288†† $1,294 $1,266
1961 $6,539 6.00% 6.88%** 18.66% $288†† $1,690 $1,844
1962 $6,866 6.25% 6.88%** –5.87% $300†† $2,127 $2,018
1963 $7,035 7.25% 6.88%** 11.99% $348†† $2,646 $2,650
1964 $7,322 7.25% 3.82% 16.47% $348†† $3,108 $3,492
1965 $7,454 7.25% 4.43% 8.36% $348†† $3,609 $4,161
1966 $7,901 7.70% 5.63% –3.30% $508†† $4,349 $4,515
1967 $8,342 7.80% 5.21% 7.83% $515†† $5,117 $5,423
1968 $8,915 7.60% 6.00% 7.36% $593†† $6,053 $6,459
1969 $9,430 8.40% 7.89% –0.87% $655†† $7,237 $7,052
1970 $9,898 8.40% 7.66% –14.94% $655†† $8,497 $6,556
1971 $10,395 9.20% 5.22% 18.11% $718†† $9,695 $8,591
1972 $11,414 9.20% 5.02% 11.10% $828†† $11,051 $10,464
1973 $12,128 9.70% 8.31% –1.62% $1,048†† $13,104 $11,325
1974 $12,849 9.90% 9.98% –22.88% $1,272 $15,810 $9,714
1975 $13,809 9.90% 6.89% 4.00% $1,367 $18,361 $11,524
1976 $14,762 9.90% 5.62% 18.40% $1,461 $20,937 $15,375
1977 $15,647 9.90% 5.92% –3.73% $1,549 $23,817 $16,293
1978 $16,890 10.10% 8.61% –2.23% $1,706 $27,722 $17,598
1979 $18,367 10.16% 11.44% 7.29% $1,866 $32,972 $20,882
1980 $20,022 10.16% 12.99% 15.30% $2,034 $39,554 $26,423
1981 $22,037 10.70% 15.77% 7.80% $2,358 $48,523 $31,027
1982 $23,250 10.80% 12.57% –6.51% $2,511 $57,450 $31,356
1983 $24,383 10.80% 9.27% 33.99% $2,633 $65,653 $45,544
1984 $25,816 11.40% 10.68% 0.03% $2,943 $75,920 $48,502
1985 $26,916 11.40% 8.25% 16.44% $3,068 $85,501 $60,050
1986 $27,715 11.40% 6.51% 26.49% $3,159 $94,430 $79,956
1987 $29,482 11.40% 7.00% 21.36% $3,361 $104,634 $101,114
1988 $30,934 12.12% 7.90% –7.34% $3,749 $116,949 $97,170
1989 $32,159 12.12% 9.08% 21.48% $3,898 $131,820 $122,773
1990 $33,645 12.40% 8.17% 3.63% $4,172 $147,104 $131,559
1991 $34,899 12.40% 5.91% 12.44% $4,327 $160,381 $152,794
1992 $36,697 12.40% 3.76% 10.50% $4,550 $171,140 $173,867
1993 $37,012 12.40% 3.28% 8.58% $4,590 $181,493 $193,764
1994 $38,006 12.40% 4.96% 1.98% $4,713 $195,434 $202,400
1995 $39,529 12.40% 5.98% 17.66% $4,902 $212,317 $243,918
1996 $41,462 12.40% 5.47% 23.85% $5,141 $229,343 $308,464
1997 $43,882 12.40% 5.72% 30.10% $5,441 $248,223 $408,376
1998 $46,178 12.40% 5.44% 24.25% $5,726 $267,775 $514,504
1999 $48,752 12.40% 5.46% 22.30% $6,045 $288,764 $636,607
2000 $51,448 12.40% 6.58% 7.59% $6,380 $314,573 $691,813
2001 $52,675 12.40% 3.64% –16.45% $6,532 $332,796 $583,478
2002 $53,203 12.40% 1.81% –16.48% $6,597 $345,522 $492,840
2003 $54,504 12.40% 1.17% –3.20% $6,758 $356,394 $483,589

Garrett and Rhine
Appendix Table A4
Maximum Earners
Maximum Maximum
Tax rate 6-Month S&P fund fund balance
Maximum (employer and CD rate 500 rate Maximum balance (6- (S&P 500
Year earnings‡‡ employee) of return of return contribution† month CD)‡ account)‡
1956 $4,200 4.00% 6.88%** 15.14% $168 $180 $193
1957 $4,200 4.50% 6.88%** –4.81% $189 $394 $364
1958 $4,200 4.50% 6.88%** 4.19% $189 $623 $576
1959 $4,800 5.00% 6.88%** 24.09% $240 $922 $1,013
1960 $4,800 6.00% 6.88%** –2.66% $288 $1,294 $1,266
1961 $4,800 6.00% 6.88%** 18.66% $288 $1,690 $1,844
1962 $4,800 6.25% 6.88%** –5.87% $300 $2,127 $2,018
1963 $4,800 7.25% 6.88%** 11.99% $348 $2,646 $2,650
1964 $4,800 7.25% 3.82% 16.47% $348 $3,108 $3,492
1965 $4,800 7.25% 4.43% 8.36% $348 $3,609 $4,161
1966 $6,600 7.70% 5.63% –3.30% $508 $4,349 $4,515
1967 $6,600 7.80% 5.21% 7.83% $515 $5,117 $5,423
1968 $7,800 7.60% 6.00% 7.36% $593 $6,053 $6,459
1969 $7,800 8.40% 7.89% –0.87% $655 $7,237 $7,052
1970 $7,800 8.40% 7.66% –14.94% $655 $8,497 $6,556
1971 $7,800 9.20% 5.22% 18.11% $718 $9,695 $8,591
1972 $9,000 9.20% 5.02% 11.10% $828 $11,051 $10,464
1973 $10,800 9.70% 8.31% –1.62% $1,048 $13,104 $11,325
1974 $13,200 9.90% 9.98% –22.88% $1,307 $15,848 $9,741
1975 $14,100 9.90% 6.89% 4.00% $1,396 $18,432 $11,582
1976 $15,300 9.90% 5.62% 18.40% $1,515 $21,069 $15,507
1977 $16,500 9.90% 5.92% –3.73% $1,634 $24,046 $16,501
1978 $17,700 10.10% 8.61% –2.23% $1,788 $28,059 $17,881
1979 $22,900 10.16% 11.44% 7.29% $2,327 $33,862 $21,680
1980 $25,900 10.16% 12.99% 15.30% $2,631 $41,234 $28,032
1981 $29,700 10.70% 15.77% 7.80% $3,178 $51,417 $33,645
1982 $32,400 10.80% 12.57% –6.51% $3,499 $61,820 $34,728
1983 $35,700 10.80% 9.27% 33.99% $3,856 $71,765 $51,700
1984 $37,800 11.40% 10.68% 0.03% $4,309 $84,195 $56,026
1985 $39,600 11.40% 8.25% 16.44% $4,514 $96,025 $70,495
1986 $42,000 11.40% 6.51% 26.49% $4,788 $107,373 $95,229
1987 $43,800 11.40% 7.00% 21.36% $4,993 $120,229 $121,629
1988 $45,000 12.12% 7.90% –7.34% $5,454 $135,615 $117,760
1989 $48,000 12.12% 9.08% 21.48% $5,818 $154,276 $150,118
1990 $51,300 12.40% 8.17% 3.63% $6,361 $173,763 $162,165
1991 $53,400 12.40% 5.91% 12.44% $6,622 $191,045 $189,788
1992 $55,500 12.40% 3.76% 10.50% $6,882 $205,377 $217,323
1993 $57,600 12.40% 3.28% 8.58% $7,142 $219,490 $243,720
1994 $60,600 12.40% 4.96% 1.98% $7,514 $238,255 $256,200
1995 $61,200 12.40% 5.98% 17.66% $7,589 $260,547 $310,383
1996 $62,700 12.40% 5.47% 23.85% $7,775 $282,985 $394,043
1997 $65,400 12.40% 5.72% 30.10% $8,110 $307,758 $523,181
1998 $68,400 12.40% 5.44% 24.25% $8,482 $333,456 $660,568
1999 $72,600 12.40% 5.46% 22.30% $9,002 $361,148 $818,853
2000 $76,200 12.40% 6.58% 7.59% $9,449 $394,994 $891,201
2001 $80,400 12.40% 3.64% –16.45% $9,970 $419,708 $752,942
2002 $84,900 12.40% 1.81% –16.48% $10,528 $438,005 $637,662
2003 $87,000 12.40% 1.17% –3.20% $10,788 $454,033 $627,670

Garrett and Rhine
NOTE: *Average wage (AWI) is the national average wage index for individuals.
†Contribution equals the earnings multiplied by the tax rate of the employee and employer.
‡Fund balance = (current year’s contributions + previous year’s fund balance) × (1 + rate of return).
**Average 6-month CD rate (1964-2003).
††For the years prior to 1974, the high earnings are greater than the maximum earnings, so the contribution will be equal to the con-
tribution for the maximum earnings.
‡‡Maximum earnings represents the maximum amount of wages subject to Social Security taxes.
SOURCE: AWI: www.ssa.gov/OACT/COLA/awiseries.html.
Social Security tax rates: www.ssa.gov/OACT/ProgData/taxRates.html.
S&P 500 rates of return: Wall Street Journal.
6-Month CD rates of return: Federal Reserve Board.
Maximum earnings: www.ssa.gov/OACT/COLA/cbb.html#Series.

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